ICO is a way of raising funds for unregulated funds for various cryptocurrency ventures. This is something that startups use to circumvent the regulated and rigorous capital raising process required by banks and venture capitalists. In such a campaign, a certain percentage of cryptocurrency is sold very early to those who support a project for other cryptocurrencies or legal tender.
How it’s done
When a firm wants to raise money using an initial coin offer, there must be a plan on white paper outlining the details of the project. It should describe what it is about, what the project needs, what it aims to accomplish. It should also state the money that will be needed to undertake the whole endeavor and how much the pioneers will get to keep.
The plan must also state the type of currency that has been accepted and how long it intends to run the campaign. During such a campaign, supporters and enthusiasts of the initiative will buy cryptocurrencies using virtual currency or fiat. Coins are called tokens and are very similar to shares of companies sold to investors during an IPO. If the minimum required funds are not reached, then the money is returned and the entire ICO is then considered a failure. Once the requirements are met within the given time frame, cash can be used to start the scheme or even complete it if it is still advanced.
Investors who participate in the project early are mostly motivated to buy crypto coins hoping that the plan will be successful and that they will get more value from it after launch. There have been very successful projects of this kind in different economies and this is one of the main things that motivates investors.
Similarities
ICOs can be compared to crowdfunding and IPOs. Just as with an IPO, the stake must be sold by startup companies in order to raise funds to help the business of such a company. The only difference is the fact that IPOs deal with investors, while ICOs work closely with supporters who are very interested in new projects, just like a set of financing.
However, ICOs differ from crowdfunds in that those who support ICOs are usually motivated by the fact that they can get a large return on investment. Funds raised through crowdfunding are basically donations. For this reason, ICOS is called mass sales.
So far, there have been many successful transactions. ICOs are an innovative tool within our digital age. However, it is important that investors take precautions as there are some campaigns that can become bogus. This is due to the fact that they are very unregulated. The financial authorities do not participate in that, and if you lose funds through such initiatives, it is difficult to follow up to get compensation.
In this sense, there are some regions that do not allow the use of ICOs at all. It is important to buy such currency only from reliable sources to be sure.